Trading with Leverage. A necessary evil?
Introduction by Tom Barson:
Today we have an article from another guest contributor, Lalarukh Khalique.
She refers to herself as a newbie trader on eToro but has survived her first 4 months on the platform is in profit and in my opinion a valuable additon to our community. Lalarukh is an involved and frequent contributor on the platform for whom nothing is too much trouble when helping other traders.
I have invited her to share her views with us.
This is part of an ongoing effort by me to include contributors from all parts of the eToro community and Eco system as we all have something to offer one another and each deserve to have our voices heard.
All of you who know me know that I warn people off of trading with leverage. However over the last couple of months with the sheer amount of copiers who have joined me and ask questions of me, I have become aware of something fundamental and that is not everyone can afford to trade with no leverage and since April 2017 the minimum position size in multiple assets has greatly increased for new members.
So putting it simply trading with leverage under these circumstances could well be a necessary evil.
So if we are going to do it then today lets look at one way of how to do it.
in this article Lalarukh Khalique will share her method of handling leverage as a trader who is relatively new to the platform and must deal with the increased minimum position sizes.
Please Click on Lalarukh's picture to visit her etoro profile.
Mr Thor (aka Tom Barson) asked me for a quick article about leverage. Here’s my stab at explaining how I view leverage.
Leverage to me is a loan you take from the broker. For newbie etoro traders who joined after April 2017, each financial instrument has high minimum trade positions, for eg:
Therefore leverage is a necessary evil for new eToro traders.
Example of using leverage for stocks:
Hazel wants to open a position in Apple stock. The minimum trade position for stocks is $500, she can either use $500 with no leverage, or she can use $100 with x5 leverage. She decides to use $100 with x5 leverage, she uses the golden rule of trading - never risking more than 1% (maximum 2%) of your capitol on a single trade.
With x5 leverage, she is essentially borrowing $450 from the broker. Once the trade is opened, she makes sure her stop loss (SL) is extended to allow for a 20% drop in Apple stock, by adding extra cash to the SL. If the stock has a risk of falling further, she has the option to artificially extend the SL further, by adding more cash to it. She also has the option to buy the dip, since she didn’t use $500 of her own money to open one position in Apple. This way she can use dollar cost averaging, and split the investment over several trades.
Now when the trade moves into profit by a certain percentage, she can place a trailing SL and this releases extra cash that was being used to extend the SL, and also protects her trade.
If she had not used leverage, and the stock dropped, she would be stuck with a $500 trade position in Apple, and would not have the flexibility to buy the dip with spare cash, compared to if she bought it with leverage. When splitting the trades into smaller pieces, she has the option to close the mini lot trades once it reaches the price of the original bought trade, a strategy I like to call “tag you’re it”.
For forex, there is a $5000 minimum trade position. Hazel decides to use $200 and x25 leverage, she’s borrowing $4800 from eToro, and in turn she makes sure she has at least a 500 pip insurance from the current price (she adds some extra cash to the SL to ensure this). If the trade goes against her further, she can add more cash to the SL to protect her trade. By adding more cash to the SL, she’s reducing the leverage and paying back more of the loan to eToro, so that her trade is not closed due to a margin call.
This strategy is to be used only on 1% (2% maximum) of your capitol on any single trade. Practice it in Virtual for at least a month or so, to get the hang of
I must give credit to the following blog post, written by eToro trader Vitverag, he taught me (when I was a fresh newbie) how to use high leverage with the same risk of low to no leverage, with better risk and money management. He explains it perfectly, I highly recommend you visit this blog to read it:
The views expressed in this article are the personal opinions of the writer and as with all articles on this blog including my own contributions not to be considered Financial advice.